A GROWING NETWORK

Parent company Sempra and Mexico’s IEnova well positioned to profit from natural gas transport

Mexico’s energy landscape is rapidly being transformed by the boom in U.S. natural gas production — and no company may be better poised to profit than a Mexico unit of San Diego-based utility holding company Sempra Energy.

Infraestructura Energética Nova, better known as IEnova, has emerged as a key investor and strategic partner in Mexico’s rapid expansion of its natural gas transport network.

Gas interconnections are being added at the U.S. border and pipelines extending south, as Mexico races to keep up with rising electricity needs while retiring costly oil-burning power plants.

Shortfalls in electricity generation in Mexico led to 22 critical alerts last year in which industrial users were asked to reduce natural gas consumption, according to Mexico’s energy ministry, costing the economy an estimated $1.5 billion. Without significant investments, the power shortfall is forecast to grow.

Under that panorama, Sempra has recognized an outsized business opportunity in Mexico, where it already has invested $2.4 billion in energy infrastructure projects.

Eager to make new investments, Sempra took its Mexico holdings public in March on the Mexican stock exchange, raising roughly $600 million.

IEnova shares now trade about 50 percent above the initial offering price, with quarterly results due out today.

Sempra retains an 81 percent interest — now worth about $3.7 billion.

The offering built on suspense surrounding a push by Mexican President Enrique Peña Nieto and his political allies to open investment in oil and gas exploration 75 years after the sector was nationalized.

Nearby IEnova assets include a 600 megawatt natural gas power plant outside Mexicali that delivers power to San Diego area utility customers. The company placed turbine orders earlier this year for the first phase of a wind farm just south of the U.S. border at La Rumerosa that could eventually extend for a hundred miles along the windswept high plains of Baja California.

Current construction projects include a major natural gas line leading south from Arizona through Sonora and Sinaloa states — an effort designed to unlock economic and industrial growth in a region stymied by energy constraints.

“It involves over 500 miles of route, so there’s right-of-ways, there are permits, there are interconnections with the U.S. border, there are interconnections you have to do with certain power plants as you go,” said George Liparidis, CEO of Sempra International, which oversees businesses in Mexico, Peru, Chile and Argentina. “It is complex … but that’s our core competency in Mexico. If you look at what we have been doing the last 15 years, it is licensing, developing and building and operating pipelines.”

At the opposite end of the country, IEnova is part of a joint venture building an ethane pipeline across portions of Chiapas, Tabasco and Veracruz states designed to invigorate Mexico’s petrochemical industry.

In its biggest bid for business to date, IEnova is seeking a leading role in the construction of the 750-mile Los Ramones natural gas pipeline from the Texas border through the rugged Huasteca region into Guanajuato state. The company already is part of a joint venture building the first short segment, and is preparing a bid on the lengthier second phase — a nearly $2 billion proposition.

On future bids in Mexico, IEnova expects to compete with well financed international energy concerns such as TransCanada, Kinder Morgan, Elecnor and GDF Suez. Mexican oil and gas monopoly Petroleos Mexicanos may keep some future projects to itself.

Sempra’s entrance into Mexico started in earnest after legal reforms to Mexico’s energy sector in the 1990s opened up private investments in the storage, transportation and distribution of natural gas and in electric power plants with some restrictions.

The company helped build the natural gas transmission backbone for Baja California state, with tie-ins to the U.S. network, as power supplies switched over from oil to natural gas.

On major, capital intensive investments in Mexico, Sempra’s subsidiaries have proven adept at building and operating assets — pipelines, power plants and compression stations that make gas flow — that are backed up by long-term contracts with large, credit-worthy companies.

Sempra’s biggest infrastructure project to date in Mexico — the $1.2 billion Costa Azul natural gas terminal on the Baja California coast at Ensenada — is backed by contracts extending through 2028 with clients including Anglo-Dutch multinational Royal Dutch Shell and Russian oil and gas giant Gazprom. Those agreements have proven to be a crucial hedge for an underused terminal.

Costa Azul opened in 2008 on the eve of a U.S. natural gas “fracking” boom using hydraulic fracturing and horizontal drilling techniques that free gas reserves deep underground by injecting pressurized, chemical-laced fluids.

Expected deliveries to Costa Azul have been diverted to Asian markets, where prices are now several times higher than in the U.S.

IEnova parent company Sempra is among the companies racing to open the first gas export terminals in the lower-48 states for liquefying and exporting natural gas at its existing Cameron import facility in Hackberry, La.

Costa Azul is a future candidate for conversion to LNG exports, Sempra executives say, though hurdles exist. Mexico, for instance, has no experience or oversight standards for that kind of liquefaction facility, Liparidis said.

If Mexico were to successfully unlock more natural gas reserves, IEnova’s infrastructure holdings are well positioned.

“They have their own resources that they want to develop — south of Texas there are some of the same (natural gas) fields,” Liparidis said. “This same infrastructure can facilitate gas going north or south.”

IEnova’s growth prospects are tied, above all, to a new mindset about natural gas, according to Liparidis.

“The factor that has changed is that people believe that gas is very abundant and can be produced very economically in North America,” he said. “And they feel more comfortable about making these capital intensive decisions because they know the commodity is going to be there for a long time at a good price.”